Wednesday, April 23, 2008

The strength of a public company? Case study: Convergys, PLDT

Quote of the Day: Why is the grass greener on the other side? Because sometimes there's more manure.

So recently someone asked me how to measure the strength of a public company. Is it when they have assets like large buildings? Is it by the number of people?

The short answer: none of the above. It's the stock the price.

The long answer: The health of a public company isn't based on how large something is (ie: Enron), but rather its stock price and shareholder wealth. Case and point, as we have seen with Bear Stearns, one of the largest brokerage firms in the world, it lost most of its value within a couple of weeks once investors started doubting them.

At the end of the day, no matter what scandal, no matter whatever bad news occurs, if the shareholders are fine with your company and are loyal -- your company will always stay afloat. However, if shareholders are starting to doubt your company's ability to have sustainable growth, your stock price will take a toll.

CASE STUDY 1: Convergys (NYSE: CVG)

Here's a U.S. based firm I looked at for investment purposes a number of years ago. After running the numbers, I ultimately didn't invest. Today I ran and looked at their margins -- I still wouldn't invest.

I have strong interest in multi-national BPO firms. These are the ones that are usually able to weather economic recessions, they bring much needed jobs overseas, they bring savings and they lower cost of living for U.S. consumers.

Convergys hit the headlines this year -- spent sums on marketing, promos, etc. But at the end of the day (or to be more precise, at the end of a decade), shareholder wealth has been flat and costs continue to go up. Their net income is roughly 5.9% of their gross revenue (169 mil / 2844 mil).

At the last annual shareholder meeting -- the conversations were less than friendly. As one prominent newspaper in the area bluntly put it, "Convergys faces investors' doubts".

In my mind if a company does not continue to have good solid performance over a 10 year period and does not capitalize on shareholder wealth, it will not survive.

"Stock price plunged 42 percent in 6 months..."

"But despite the positive moves, the company's stock price plunged 42 percent in a six-month period, dropping from $24 per share in July 2007 to $13.66 in March 2008. It now sits just 7 percent higher than its price at the company's initial public offering in 1998. Convergys stock price dropped more than 3 percent in afternoon trading Tuesday, to $15.76 per share."

"I think the issue here is, it's been 10 years," since Convergys was taken public, he said. In that time, the company's share price has climbed 7.5 percent. "We would have done better in Treasury bonds," Taxin said. Convergys shares closed down nearly 3 percent on Tuesday, at $15.84. The stock is down 3.77 percent year-to-date.

The Philippines Long Distance Telephone (PLDT) company is one of my favorite companies in Asia. Traded as "PHI" in the New York Stock Exchange, it has performed well in the past 10 years. They pay dividends to their shareholders and because of their continued revenue growth and consistent net returns -- they have solidified themselves as the market leader in Southeast Asia. Their net income is roughly 27.2% of their gross revenue (34 bil / 125 bil).

The bottom line with PLDT: they have higher margins and better shareholder wealth. That means they can outlast market volatility and if you are working for these guys, you can feel safe that your job is secure because the investors have confidence in their ability to perform.

CONCLUSION

At the end of the day, when you look for a company to invest in (or work in), look for the company that is managed well. Some companies act like young adults with new credit cards -- they spend money that they do not have and at the end of the day, they go bust. While other companies spend moderately and invest over long term goals versus short term.